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Interest! You Can Either Earn It, or Pay It

The interest rates for home mortgage loans have been at a historic low for some time. The interest on savings accounts and other accounts are fluctuating due to the economy. Whether paying it or earning it, interest surrounds our financial decisions.

What is Interest?

The concept of interest can be hard to understand. If you are a lender, allowing someone to use your money, they pay back the money borrowed, at a certain amount of interest charged on the amount. This type of interest is charged in home loans, auto loans – any loan taken out from a bank or private lender.

Interest can also be earned from various accounts. You have heard the term annual percentage rate. This is the rate at which the bank pays you interest to use your money for various reasons. The higher amount you invest in an account, or the longer you leave the money in the account, the higher the interest you will earn off the money in that account.

Paying Interest

Making only minimum monthly payments on credit card bills, student loans, or any type of loan will swallow you up in interest. The best way to avoid paying thousands of dollars in interest, it to pay more to the principal on these loans, knocking out the original amount borrowed faster.

On a $10,000 loan, only paying the minimum payments, with 5% interest rate for 5 years, you will pay $1,400 in interest over those years.

On a $200,000 home loan, only paying the minimum balance for 30 years with 4.5% interest, you end up paying almost $165,000 in interest. The total price of the $200,000 home became $365,000.

Paying extra to the principle each month will lower the amount of interest you will pay over the life of the loan.

Earning Interest

Financially, the best place to be is earning interest, not paying it. Investing your money in the best banks CDs and money market accounts is one way to earn interest. Online banks typically have higher interest rates than brick and mortar banks. Longer term CDs also have higher interest rates as well as CDs and money markets with high minimum deposits. These are all different accounts to help you earn interest off the money you have invested.

If you invested $10,000 in a five year CD that earned 2.12%, over the course of those five years, you would earn over $1,100 in interest. If you continue to put money into the account each month, the interest earned will keep growing.

These investment options mentioned are all safe options. There isn’t any risk involved because you know you can’t lose money, just earn it. If you are willing to take risks, there are other investments with higher interest returns.

Which Do You Rather?

So, would you rather pay money in interest or earn it? The truth is we all are destined to have both forms of interest in our lives. The trick is, to get the interest you are paying paid back as quickly as possible. By paying down those debts faster than planned, you will end up saving yourself thousands, if not hundreds of thousands of dollars in interest. Find ways to pay down credit cards, student loans, home loans, auto loans, whatever loan you may have to avoid paying interest. Find ways to invest money into the best bank accounts earning interest.